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Age-Targeted Income Taxation, Labor Supply, and Retirement

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  • Johan Gustafsson

Abstract

This paper studies the life-cycle effects of favorable marginal tax treatment of older workers on their optimal life cycle labor supply, retirement timing, and savings. I develop a structural model in continuous time where the life-cycle of a representative agent is divided into three distinct phases: pre-treatment, post-treatment, and retirement. Solutions for consumption/savings, labor supply/leisure, and retirement timing are then obtained by solving the model as a salvage value problem. I then calibrate the model to Swedish earnings data and find that the increased extensive margin labor supply is partially offset by a reduction in hours worked during the pre-treatment period. The total effect is however an increase in life-cycle labor supply and consumption.

Suggested Citation

  • Johan Gustafsson, 2021. "Age-Targeted Income Taxation, Labor Supply, and Retirement," CESifo Working Paper Series 8988, CESifo.
    • Handle: RePEc:ces:ceswps:_8988
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp8988.pdf
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    References listed on IDEAS

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    Cited by:

    1. Gustafsson, Johan, 2021. "Public Pension Reform and the Equity-Efficiency Trade-off," Umeå Economic Studies 992, Umeå University, Department of Economics.

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    More about this item

    Keywords

    retirement age; life cycle; tax heterogeneity; savings consumption; leisure;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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